Can Gary Wendt Work His Magic At Conseco?

He built GE Capital. But he faces a formidable challenge with the troubled holding company

From the shaded poolside of his Greenwich (Conn.) home, Gary C. Wendt launches into his view of the troubled financial-services company he has just been paid $45 million up front to rescue. He produces a one-page chart that sums up his view of Conseco Inc., a former Wall Street darling that in June pinned its survival on the former superstar of GE Capital Services Inc. One box reads: "Very nice insurance company." Another: "Very nice finance company." And a third hints at the complex challenges that Wendt, 58, now faces: "Not so very nice holding company."

Not so nice, indeed. Conseco--through a series of rapid, costly acquisitions, a pileup of $10.9 billion of debt, and questionable accounting practices--was nearly brought to its knees before the sudden resignation in April of its freewheeling, free-spending former chief executive, Stephen C. Hilbert.

The problems are so many and so thorny that even ardent Wendt fans wonder if he can fathom--much less fix--the mess. Wendt, who built Stamford (Conn.)-based GE Capital into General Electric Co.'s largest and most profitable business, spent the past two years mostly sidelined after resigning from GE in December, 1998. He says it was 30 days from the first phone call from Conseco (he said no initially) to the moment he agreed to sign on. He landed at the company's Carmel (Ind.) headquarters on June 29. And already, he says he is confident that Conseco's elaborate, debt-laden holding company can't overwhelm the underlying businesses of life insurance and financing mobile-home and home-equity loans. Says Wendt: "That's my assessment."

"NO FIRE SALES." While he hasn't been at Conseco long enough to have a detailed rescue plan, Wendt sketches out the framework for what he has in mind: restructure the holding company, sell assets, realign management and businesses, reenergize the company's 17,000 employees. But he cautions not to expect him to unload assets just to raise quick cash: "At GE, I learned to buy properties at low prices; I didn't learn to sell at low prices. We're not going to sell things at low prices. We're going to maximize shareholder value. And one of the ways we're going to do that is to make sure we satisfy our creditors. There will be no fire sales at Conseco."

Although doubts persist that Conseco can cut its huge debt fast enough to survive, longtime Wendt-watchers give him a strong shot at pulling off a turnaround. "Gary's been through plenty of fire in his career," says former GE auditor and analyst Nicholas P. Heymann at Prudential Securities Inc. "Ultimately, in those situations, the best determinant of success is negotiating skill. Gary possesses exceptional negotiating skills. He has the best prospects--of anybody--to sort Conseco out."

Wendt has drafted three close associates from GE Capital to help implement his new strategy. Two have deep experience in working out problem loans: Paul Street, most recently Wendt's partner at his Global Opportunity Advisors investment fund, and Peter Keenoy, former chief-credit officer for GE Capital's corporate lending business. The third draftee from GE Capital days, Michael Borom, also was a chief financial officer at Aetna Inc.'s old property-and-casualty insurance unit. Wendt's first task is to come up with $1.3 billion due to banks in September. Wendt says he and his new team are "putting together a long list of things we can do to satisfy our obligations." But can he act quickly enough--and at what cost? And will the businesses hold up long enough for the company to shed its massive debts?

The insurance and mobile-home finance businesses are healthy and profitable, insists Wendt. Indeed, its Green Tree Financial Corp unit, a subprime and manufactured-home lender, was such a tough competitor that it knocked GE Capital out of mobile-home finance. It now has a commanding 30% market share. "Conseco's home-equity and home-improvement lending businesses are profitable, too," Wendt says. That may be an overly rosy view, however. Since Conseco bought Green Tree in June, 1998, it has taken more than $1 billion in write-offs due to losses. Moreover, the insurance unit's first-quarter profits were half those of the prior year and its ratings were recently downgraded by A.M. Best. Analyst Kathy Shanley at Gimme Credit says Conseco must find equity from an outside investor. But, says Shanley, it's not a sure bet that it will get capital from such outsiders as private equity firm Thomas H. Lee Co., which invested $500 million last December. "If they don't attract another outside investor, they may face some serious issues," says Shanley. "Bankruptcy is certainly a possibility."

Wendt, whose combed-back red hair and compact build blend with an intense, direct manner, quickly takes issue with the suggestion that he might have taken an early exit from his noncompete contract with GE merely to shepherd Conseco into bankruptcy. Can he avoid it? Says Wendt: "The answer is an emphatic yes! Granted, by taking on the challenge at Conseco, I'm also taking on a very large financial risk. I've tackled a job where I will receive no salary or bonus for two years. If we can deliver substantial rewards to shareholders at the end of those two years--and I believe we will--then I'll be well-compensated for my efforts."

DISINGENUOUS? Wendt also argues that he may end up forfeiting tens of millions of dollars by taking the Conseco job, because GE was paying him $65 million under his noncompete agreement. But that strikes some at disingenuous. "With an upfront payment of $45 million in cash and 3.2 million of restricted shares which vest over two years, and an annuity payment of $1.5 million a year, which kicks in in seven years for the remainder of his life, Wendt is hardly taking on a lot of risk," says Colin Devine, an insurance analyst at Salomon Smith Barney. And unlike Jamie Dimon, a former president at Citigroup, who was brought in to turn around Bank One Corp. and immediately invested $57 million of his own money, Wendt put in none of his own.

So what can Wendt do quickly to shore up ailing Conseco? One possibility is to issue more equity to raise cash, says one hedge-fund manager. But the problem is this: To sell, say, $2 billion of equity at a current share price of $7, the company would have to almost double the number of existing shares. A secondary offering of that magnitude would immediately dilute the share price from $7 to possibly $4, or less. That wouldn't affect Wendt, however. His compensation package ensures his own options won't be diluted. "If you're a common shareholder, you're hosed under this scenario," says one investor.

Conseco could also potentially erase more than $2 billion of debt by using one simple strategy, analysts say. The company has $2.6 billion of trust preferreds, a type of subordinated debt, outstanding. If it could negotiate to turn those into common equity, the debt liability would disappear. Failing that, Conseco could stop paying interest on that debt for up to five years, thus easing the cash crunch.

DESPERATE. But Wendt's easiest course would seem to be selling assets. Getting the prices he wants, though, could be hard. Earlier this year, Conseco tried to sell Green Tree for $3 billion, but apparently couldn't find a buyer. And First Union Corp. shut down its Money Store Inc. unit, the leading player in the subprime market, after it couldn't find a buyer either.

What about the insurance side? Last year, Hartford boutique research firm Fox-Pitt Kelton Inc. estimated Conseco's insurance businesses were worth $3.5 billion. Their value is now probably lower because losses have spiked in all of its insurance lines. Besides, lower Best ratings will probably crimp Conseco's ability to write new business.

Conseco's board has a lot to lose if the company declares bankruptcy, even if that tactic offers the best route to restructuring. Board members are personally on the hook for more than $380 million used to buy Conseco shares in the mid-30s. Those loans however, are guaranteed by the company. If Conseco were to go bankrupt, no doubt some of the directors would likely have to make themselves bankrupt too.

The cost of Wendt's package to Conseco today totals about $100 million, including 10.5 million warrants issued to GE to buy Conseco's shares at $5.75 each in return for releasing him. Says one compensation expert, "This highlights that the board believed this company was in desperate shape. This is a deal you negotiate when there's almost no chance of saving the company, and you're willing to pay anything for a shot."

Wendt, of course, arrives with a formidable reputation and all the expertise he amassed building and fixing businesses at GE Capital. There, within a dozen years, he transformed a fledgling financial-services division into a behemoth that was producing 40% of GE's overall profits when he left.

His new job will be far tougher, though. Without the luxury of GE's strong balance sheet behind him, Wendt is largely on his own this time.

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